With upstart electric vehicle manufacturer Tesla lobbying hard to sidestep the franchise dealership model in place in most states, the National Automobile Dealers Association (NADA) commissioned a report defending the franchise model, while outlining the drawbacks of previous direct-sales efforts by OEMs.
In the report, you mention some previous direct sales efforts the OEMs engaged in. What happened in those cases?
In the 1990s there was a belief, in part fostered by some research from McKinsey and Booz Allen Hamilton, that there were these various profit points throughout the lifecycle of the car. GM and Ford developed strategies to try to capture more of those profits throughout the lifecycle of the car.
Ford in particular bought salvage yards, auction houses, they had an insurance company, and they probably went the farthest. GM also had a big project in the works, and they were all looking at ways for the Internet to help them reduce costs. They looked at the dealer profits and said, "Those are really my profits," which is the way OEMs tend to look at everything.
Ford went out and acquired dealerships in five cities, and shut down some stores thinking they could be more efficient and productive, and the marketing spend wouldn't be as high. But the corporate bureaucracy couldn't react to small but important changes in the local marketplaces, those stores couldn't compete, and it failed.
There is a report that got a lot of attention by Gerald Bodisch for the Department of Justice about GM's build-to-order direct sales of the Celta in Brazil. I asked GM, and they told me the project was canceled in 2006 because of the high cost of managing online sales and distribution. So where are the savings?
If you are going to sell cars to ordinary people, you have to be able to provide all of the services and functionality that they require: taking trade ins, handling their financing, dealing with the DMV and the paperwork, having a place to get the car repaired, and having a car on hand when they decide to buy it. That's the way Americans buy cars.
What are the benefits of the franchise model on the service and repair side?
The franchise system is stressed. Existing GM dealers today have to fix Saturns, Pontiacs, Hummers and Saabs that the company doesn't make anymore. GM just recalled 16 million cars. Who will do a better job for the owners? For the dealer it's a no brainer. You do the work as best as you can because it yields a happier customer. I don't see how auto companies would be as efficient in terms of actual capacity to service those customers.
Auto companies have found other ways to think about service, and I think that what they are doing now is smarter. Ford has their tire program and they encourage their dealers to offer quick lube lanes and other services. That's part of brand building. A lot of manufacturers sell cars with prepaid maintenance programs. That keeps the customer coming back to the dealer.
